Q4 2024 Datadog Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Q4 2024 Datadog Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: I would now like to hand the conference over to your speaker today, Yuka Broderick, Senior Vice President of Investment Relations. Please go ahead.
Yuka Broderick: Thank you, Daniel. Good morning, and thank you for joining us to review Datadog's fourth quarter 2024 financial results, which we announced in our press release issued this morning. Joining me on the call today are Olivier Pomel, Datadog's co-founder and CEO, and David Obstler, Datadog CFO.
Yuka Broderick: During this call, we will make forward-looking statements, including statements related to our future financial performance, our outlook for the first quarter and the fiscal year 2025, and related notes and assumptions, our gross margins and operating margins, our product capabilities, our ability to capitalize on market opportunities, and usage optimization trends.
Yuka Broderick: These statements reflect our views only as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially.
Yuka Broderick: For a discussion of the material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended September 30th, 2024. Additional information will be made available in our upcoming Form 10-K for the fiscal year ended December 31st, 2024 and other filings with the SEC.
Olivier Pomel: With that, I'd like to turn the call over to Olivier.
Olivier Pomel: Thanks, Yuka, and thank you all for joining us this morning. We had a strong Q4 to end a very productive year. During 2024, we kept building and innovating as we scaled up our teams and went broader and deeper into the problems we saw for our customers from the cloud to AI.
Olivier Pomel: We continued to add new customers and expand with existing ones, and we delivered more value as customers adopted more products into the Datadog platform.
Olivier Pomel: Let me start with a review of our Q4 financial performance.
Olivier Pomel: Revenue was $738 million, an increase of 25% year-over-year, and above the high end of our guidance range.
Olivier Pomel: We ended with about 30,000 customers, up from about 27,300 a year ago.
Olivier Pomel: We ended Q4 with about 3,610 customers with an ARR of $100,000 or more, up from about 3,190 a year ago. These customers generated about 88% of our ARR.
Olivier Pomel: We had 462 customers with ARR of $1 million or more compared to 396 a year ago.
Olivier Pomel: and we generated free cash flow of 241 million dollars with a free cash flow margin of 33 percent.
Olivier Pomel: Turning to platform adoption, our platform strategy continues to resonate in the market.
Olivier Pomel: As of the end of Q4, 83% of customers were using two or more products, which is about the same as last year.
Olivier Pomel: 50% of customers were using four or more products, up from 47% a year ago.
Olivier Pomel: 26% of our customers were using six or more products, up from 22% a year ago, and 12% of our customers were using eight or more products, up from 9% a year ago.
Olivier Pomel: During 2024, we continue to land and expand with larger customers. As of December 2024, 45% of the Fortune 500 are Datadog customers, up from 42% in 2023.
Olivier Pomel: We think many of the largest enterprises are still very early in their journey to the cloud.
Olivier Pomel: The median data log ARR for our Fortune 500 customers is still less than half a million dollars, which leaves a very large opportunity for us to grow with these customers.
Olivier Pomel: So we're serving more customers with more products, and we're also very pleased to celebrate several milestones for the business.
Olivier Pomel: First, our total ARR now exceeds $3 billion. A big achievement for all of us at Datadog, even though we're still only just getting started.
Olivier Pomel: And we have achieved this milestone largely by growing our first product, infrastructure monitoring, and expanding into the other pillars of observability, EPM and log management.
Today, infrastructure monitoring contributes over 1.25 billion in AR.
Olivier Pomel: But we didn't stop there, as log management is now over 750 million in AR, and so is our third pillar, as our end-to-end APM products together also exceed 750 million in AR.
Olivier Pomel: Note that end-to-end APM includes all the Datadog products our customers use to monitor the applications, which are Core APM, Continuous Profiler, Database Monitoring and Error Tracking, as well as Synthetics and Regular Monitoring.
Olivier Pomel: Now remember that even in these three pillars of observability, we're still just getting started, as more than half of our customers do not buy all three pillars from us, or at least not yet.
Olivier Pomel: Meanwhile, we are making progress with our other products and we are pleased to see them increasing in customer usage and growth.
Olivier Pomel: Products outside the three pillars now contribute over 200 million dollars in AR and we are excited about our growth opportunities in many new products in this group.
Thank you for watching!
Now let's discuss this quarter's business drivers.
Olivier Pomel: In Q4, we saw usage growth from existing customers that was roughly similar to the year before.
Olivier Pomel: Our usage growth during the quarter generally played out as expected, including a stronger October and November, and a slowdown we typically see at the end of December.
Olivier Pomel: We continue to experience a stable business environment and our customers overall are growing their cloud usage while some are continuing to be cloud-conscious.
Olivier Pomel: We also hit a new record in bookings this quarter, as our go-to-market teams executed in our first-ever quarter with over $1 billion in bookings.
Olivier Pomel: As a reminder, our bookings don't translate immediately into revenue growth, but it is an indicator that we continue to serve our new and existing customers well, and they are growing with us over time.
Olivier Pomel: Finally, churn has remained low, with gross revenue retention stable in the mid to high 90s, highlighting the mission-critical nature of our platform for our customers.
Thank you for watching!
Moving on to R&D.
and what we build in 2024.
Olivier Pomel: We released over 400 new features and capabilities this year. Now that's too much for us to cover today, but let's go over some of our innovations.
First, we continue to improve the data platform.
Olivier Pomel: We now have more than 850 integrations, making it easy for our customers to bring in every type of data they need, benefit from all the new AWS, Azure, GCP and OCI capabilities, and engage with the latest technologies, like the newly emerging AI stack.
Olivier Pomel: We announced Kubernetes Autoscaling to help customers ride fast the Kubernetes environments without impacting stability and performance.
Olivier Pomel: We launched Datadog monitoring for Oracle Cloud Infrastructure, so customers can now monitor their OCI stack and unify their monitoring across all clouds and on-prem environments.
Olivier Pomel: And we took several big steps to expand on Datadog as the best observability platform for OpenTelemetry users.
Olivier Pomel: including making our infra monitoring and APM instrumentation fully interoperable with OTEL components and improving the experience for OTEL customers by embedding the OTEL collector directly within the data region.
Olivier Pomel: In the NextGen AI and LLM space, we continue to add capabilities to BITS.AI, launching BITS.AI for incident management and previewing BITS.AI for autonomous investigations.
Olivier Pomel: We launched LLM Observability and General Availability to help customers evaluate, safely deploy, and manage their models in production.
And we continue to see increased interest in NextGen AI.
Olivier Pomel: At the end of Q4, about 3,500 customers used one or more Datadog AI integrations to send us data about their machine learning, AI, and ML usage.
Thank you very much.
Olivier Pomel: In the end-to-end ATM space, our error tracking product now allows customers to view and manage errors across user sessions, applications, and logs, all in one place.
Olivier Pomel: We kept building out data observability, including the launch of data jobs monitoring to help data engineers detect problematic Spark and Databricks jobs anywhere in their pipelines.
Olivier Pomel: And we expanded the technologies we can provide deep insights into, such as Amazon SQS in data stream monitoring and MongoDB in database monitoring.
Thank you for watching!
Olivier Pomel: In digital experience, our customers can now use our mobile app testing to test iOS and Android applications on real mobile phones.
Olivier Pomel: We allow faster investigation of mobile app issues with Mobile Session Replay.
Olivier Pomel: And while product analytics remained in early stages, we are encouraged by customer interest in using Datadog to analyze user behavior for better business outcomes.
Olivier Pomel: In log management, flex logs launch into general availability and customers can now cost-effectively retain and analyze massive volumes of data over long periods of time.
We expanded log workspaces for advanced analytics inquiring.
Olivier Pomel: And we simplified the deployment of the BT pipelines, with new out-of-the-box templates and granular configuration options.
Thank you for watching!
Olivier Pomel: In cloud security, we now have more than 7,000 customers using one or more security products.
Olivier Pomel: We launched agentless scanning to detect risks and vulnerabilities within hosts, containers, and serverless across a whole cloud account in a few clicks.
Olivier Pomel: We shipped Datadog infrastructure as code security, so our customers can identify and fix misconfigurations in their Terraform and CloudFormation code.
Olivier Pomel: Our customers can now use Kubernetes Security Posture Management to benchmark their environments against industry best practices.
Olivier Pomel: We launched CodeSecurity to detect vulnerabilities in first-party code running in production environments.
We continue to expand on our software composition analysis capabilities.
Olivier Pomel: And we built many more integrations, content packs, and investigative workflows into our Cloud SIEM product.
Thank you for watching!
Olivier Pomel: In software delivery, developers can now use Datadog code security with quality gates to ensure production code meets quality, security, and performance standards.
Olivier Pomel: And we announced the ability for customers to observe DORA metrics to improve the speed and efficiency of their engineering teams.
Olivier Pomel: In cloud service management, we launched our modern scheduling solution, Datadog Oncall, for general availability last month.
Olivier Pomel: We are already seeing significant customer interest parts and are excited to solve this problem for our users.
Olivier Pomel: We launched event management for general availability using AIOps to intelligently aggregate, consolidate, and simplify alerts from any sources.
Olivier Pomel: We built out our case management functionality so users can triage, assign, and close production-related tickets faster.
Olivier Pomel: And finally, our App Builder product lets users build apps to implement their own custom processes and workflows and take action directly within Datadog.
Thank you for watching!
Let's move on to sales and marketing.
Olivier Pomel: We had a strong close to 2024 with record bookings and some very exciting new logos and expansions.
Let's go through a few.
Olivier Pomel: First, we landed a seven-figure ununited deal with a major U.S. financial institution.
Olivier Pomel: This company was struggling with high costs and expensive logging tools.
Olivier Pomel: By using Datadog Flex logs and observability pipelines, this customer expects to save money on log management and will redeploy those savings to invest in observability transformation.
Olivier Pomel: This customer is starting with four Datadog products and is replacing four commercial and open source tools.
Olivier Pomel: Next, we landed a seven-figure annualized deal with a large Brazilian retail company.
Olivier Pomel: This company had built a homegrown, open-source-based observability tool, but had poor visibility into customer journeys for their shopping applications.
Olivier Pomel: With Datadog, they quickly improved application performance, which drove higher app store ratings, better digital reputation, and improved user confidence.
These customers are standing with five dead at a part.
Olivier Pomel: Next, we launched a 60-year annualized deal with the leading American entertainment company.
Olivier Pomel: This company had limited visibility into their customers' experience on in-store kiosks and on their mobile app.
Olivier Pomel: By using Datalog's unified platform, this company will correlate monitoring across front and backend, and enable multiple teams to collaborate for improved customer experience.
Olivier Pomel: This land deal featured our brand-new product analytics capabilities and will displace two commercial observability and analytics tools.
Thank you for watching!
Olivier Pomel: Next, we landed a high six-figure annualized deal with a U.S. federal health insurance company.
Olivier Pomel: This company's Medicare services business requires a sim, but its sim tool was expensive and poorly adopted by the teams.
Olivier Pomel: They will now rely on both FlexLogs and our Cloud team within GovCloud for significant cost savings, all that while improving security and compliance.
Olivier Pomel: And we have the opportunity to provide additional value and expand to three pillars and to an observability over time.
Next.
Olivier Pomel: We signed a seven-figure annualized expansion with a Fortune 100 oil and gas company.
Olivier Pomel: This customer is moving thousands of hosts from on-prem to the cloud.
and we'll replace two legacy infrastructure and network monitoring tools.
Olivier Pomel: The estimated cost and productivity savings from replacing these legacy tools exceed $1 million annually.
Olivier Pomel: And we work with them to evaluate the productivity gains when thousands of users saw less disruption by incidents, for expected savings of over $10 million per year.
This customer is expanding to use 14 Datadog products.
Thank you for watching!
Olivier Pomel: Last for today, we signed a seven-figure annualized expansion with a leading security software company.
Olivier Pomel: This customer built a homegrown log management tool using open-source software, but it was time-consuming to maintain, extremely costly, and performed poorly with unacceptable delays.
Olivier Pomel: By moving to FlexLogs, this customer is already saving on tool costs, producing mean time-to-resolution and increasing user productivity with estimated savings of over 1 million dollars a year.
And this customer is expanding to use eight developed products.
And that's it for this quarter's highlights.
Olivier Pomel: Congrats again to our go-to-market teams for their great work in 2024, our best ever close to the year, and the exciting plans they've laid out for 2025.
Thank you for watching!
David Obstler: Before I turn it over to David for a financial review.
A few words on our longer-term outlook.
David Obstler: We continue to believe digital transformation and cloud migration are long-term secular growth drivers of our business as well as critical for every company to deliver value and gain competitive advantage.
David Obstler: And we think moving to modern cloud-based technologies is more important than ever as more companies step up to adopt AI capabilities.
David Obstler: We continue to focus on delivering innovation and value to our customers against their mission-critical needs.
David Obstler: And more than ever, we feel ideally positioned to help customers of every size, in every industry, to transform, innovate, and drive value through technology adoption.
David Obstler: And with that, I will turn it over to our CFO. David?
Thanks, Olivier.
David Obstler: to dive into some of the drivers of the Q4 revenue growth.
David Obstler: We continued to see conditions that were similar to recent quarters and roughly stable throughout 2024 with continued movement to cloud and modern DevOps technologies.
David Obstler: and with customers remaining cost conscious and seeking efficiency and value from their spend.
David Obstler: In Q4, we saw usage growth from existing customers that was roughly similar to the usage growth in the year-ago quarter.
David Obstler: Next, we continue to see robust contribution from AI native customers.
David Obstler: who represented about 6% of Q4 ARR, roughly the same as the quarter, as last quarter, and up from about 3% of ARR in the year ago quarter.
David Obstler: AI native customers contributed about five percentage points of year-over-year revenue growth in Q4 versus four points in the last quarter and about three points in the year ago quarter.
David Obstler: So, we saw strong growth from AI-native customers in Q4. We believe that adoption of AI will continue to benefit Datadog in the long term.
David Obstler: Meanwhile, we did see some optimization and volume discounts related to contract renewals in Q4.
David Obstler: We remain mindful that we may see volatility in our revenue growth on the backdrop of long-term volume growth from this cohort, as customers renew with us on different terms and as they may choose to optimize cloud and observability usage.
Thank you for watching!
Next, as we look at usage growth by
David Obstler: Similar to recent quarters, we are seeing the strongest year-over-year usage growth from our enterprise customers.
David Obstler: Meanwhile, our SMB customers' usage growth remained silent, with slight year-over-year acceleration versus last quarter.
David Obstler: As a reminder, we define enterprise as customers with 5,000 employees or more, mid-market as customers with 1,000 to 5,000 employees, and SMB as customers with less than 1,000 employees.
regarding our retention metrics.
David Obstler: Our trailing 12-month net revenue retention percentage was in the high 110s in Q4 compared to the mid-110s last quarter. And finally, our trailing 12-month gross revenue retention percentage remained stable in the mid-to-high 90s.
David Obstler: Regarding our customer growth, we added 800 net customers in Q4 for a total of around 30,000 customers.
David Obstler: This includes the highest number of Gross New Logos and Dollar New Logo annualized bookings since early 2023.
Now moving to our financial results.
Billings were $908 million, up 26% year-over-year.
David Obstler: Remaining Performance Obligations, or RPO, was $2.27 billion, up 24% year-over-year.
Current RPR growth was in the mid-20s percent year-over-year.
David Obstler: RPO duration was down year over year. Normalizing for duration, RPO growth was in the mid-30s year over year.
David Obstler: We continue to believe revenue is a better indication of our business trends than billings and RPO, as those can fluctuate relative to revenue based on the timing of invoicing and the duration of customer contracts.
Now let's review some of the key income statement results.
Unless otherwise noted, all metrics are non-GAAP.
David Obstler: We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release.
First, gross profit in the quarter was $603 million.
for a gross margin of 81.7%.
David Obstler: This compares to a gross margin of 81.1% last quarter and 83.4% in the year-ago quarter.
David Obstler: Our Q4 OPEX grew 30% year-over-year, accelerating from 21% last quarter as we continue to execute on our hiring plans.
David Obstler: This includes our successful investment in sales and marketing, which grew 31% year-over-year in Q4 2024 to 23% of revenues.
David Obstler: up from 5% year-over-year growth in Q4 of 2023 at 22% of revenues.
David Obstler: We ended 2024 with sales and marketing headcount of about 3,000, up from about 2,400 at the end of 2023.
David Obstler: This also includes our successful investment in R&D, which grew 29% year-over-year in Q4 2024 to 29% of revenues, up from 15% year-over-year growth in Q4 last year at 28% of revenues.
David Obstler: We ended 2024 with R&D headcount of about 3,100 up from 2,400 at the end of 2023.
David Obstler: Q4 operating income was $179 million, or a 24% operating margin compared to 25% last quarter and 28% in the year-ago quarter.
Now turning to the balance sheet and cash flow statements.
David Obstler: We ended the quarter with $4.2 billion in cash, cash equivalents, and marketable securities.
In December, we issued a five-year, $1 billion convertible note.
David Obstler: We used $122 million of the proceeds for transaction costs and cap calls associated with these notes.
David Obstler: And simultaneous with the issuance of these notes, we repurchased approximately 15% of our outstanding 2025 convertible notes and terminated the associated cap calls for a net cost of $142 million.
David Obstler: After taking into account this issuance and repurchasing activity, our cash balance increased by $736 million net.
David Obstler: 636 million principal amount of the 2025 convertible notes and associated cap calls remains outstanding, and we expect to retire the outstanding amount of the 2025 notes.
on or before their maturity date of June 15, 2025.
Cash flow from operations was $265 million in the quarter.
David Obstler: After taking into account capital expenditures and capitalized software, free cash flow was $241 million, for a free cash flow margin of 33%.
David Obstler: and now for our outlook for the first quarter and fiscal year 2025.
First.
Our guidance philosophy remains unchanged.
David Obstler: As a reminder, we base our guidance on trends observed in recent months and apply conservativism on these growth trends.
David Obstler: So, for the first quarter, we expect revenues to be in the range of $737 to $741 million, which represents 21% year-over-year growth.
David Obstler: Non-GAAP operating income is expected to be in the range of $162 to $166 million, which implies an operating margin of 22%.
David Obstler: And non-GAAP net income per share is expected to be $0.41 to $0.43 per share, based on approximately 366 million weighted average diluted shares outstanding.
David Obstler: And for the full fiscal year 2025, we expect revenues to be in the range of $3.175 to $3.195 billion, which represents 18 to 19 percent year-over-year growth.
David Obstler: And non-GAAP net income per share is expected to be in the range of $1.65 to $1.70 per share based on approximately 369 million weighted average diluted shares outstanding.
Now for some additional notes on this guidance.
as it relates to our growth in OPEX and hiring.
David Obstler: First, we successfully executed on our hiring plans in 2024, ending the year with about 6,500 employees, growing 27% year-over-year, and we remain excited by our numerous long-term growth opportunities.
David Obstler: Our operating profit guidance reflects our intent to continue to invest for future growth in 2025.
David Obstler: Because of that, our operating profit guidance implies operating expense growth in the high 20s percent range year-over-year.
David Obstler: As we did in 2024, we expect to grow our investments in both sales and marketing and R&D this year.
David Obstler: As I discussed earlier, in Q4, sales and marketing expenses grew 31% year over year, and R&D expense grew 29% year over year.
David Obstler: We continue to expand our capabilities in sales and marketing, including expanding in our less mature geographies, adding more channel and alliance capabilities, and extending our efforts around larger enterprises, among many other initiatives.
David Obstler: And in R&D, we are focused on delivering more value to our customers, both in expanding the number of products for our customers and the capabilities we add as part of the Datadog platform.
David Obstler: Meanwhile, we continue to balance our investments in long-term growth with financial discipline as we have executed in the past.
David Obstler: Now turning to the other areas of the P&L, first we expect net interest and other income for fiscal 2025 to be approximately a hundred and twenty million dollars.
David Obstler: Regarding taxes, our non-GAAP tax rate is 21% in fiscal year 2025, and this is reflected in our non-GAAP net income per share guidance.
David Obstler: While we have utilized the majority of our U.S.-based NOLs, we have R&D tax credits and deductions related to stock-based compensation that reduce our cash tax payments.
David Obstler: Finally, we expect capital expenditures and capitalized software together to be in the 4-5% of revenues range in 2025.
David Obstler: Now to summarize, we are pleased with our execution in 2024. We are well positioned to help our existing and prospective customers with their cloud migration and digital transformation journeys.
and we continue to invest in our growth opportunities.
in 2025.
David Obstler: I want to thank all Datadogs worldwide for their efforts last year, and I'm very excited about our plans for this year.
David Obstler: And with that, we will open the call for questions. Operator, let's begin the Q&A.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 1 1 again.
Please stand by while we compile the Q&A roster.
Thank you for watching!
Speaker Change: And our first question comes from Mark Murphy with J.P. Morgan. Your line is open.
Mark Murphy: Thank you so much. Great to see the record bookings in Q4. I'm curious how you're feeling overall about the book of business for AI native customers.
Mark Murphy: We recall you anticipated several months ago that some of them were growing so rapidly today.
Mark Murphy: They would increase their commitments with better terms, and I'm curious if the developments that you mentioned on the call aligned with that.
Mark Murphy: or whether any of them might become so large that they would try to handle observability in-house.
Mark Murphy: In other words, I'm trying to understand if the AI usage and commits are kind of on the same trajectory that they were on, or whether you feel that there are some oscillations there.
Mark Murphy: Yeah, thanks for the question. So I think in general, what happened during the quarter is pretty much what we thought would happen when we discussed it.
in their last year in school.
Mark Murphy: When you look at the AI cohort, we definitely saw some.
Mark Murphy: Renewals with higher commits, better terms, and optimization news at all at the same time, which is fairly typical.
Mark Murphy: You know, what typically happens with large range customers, in particular, is...
Mark Murphy: At the time of renewal, customers are going to try and optimize what they can, they're going to get better prices from us, they'll up their commitments. And we might see a flat or down month or quarter after that, with a still sharp growth from the year before and growth to come in the year to come.
David Obstler, Yuka Broderick
Now, when you talk about some very large customers that
Tech Industries
There is always customers that want to in-house
their observability or monitoring.
Mark Murphy: Typically what we see is it's more of a cultural choice, you know, because it's not economically rational unless you have a combination of tremendous scale
Mark Murphy: exceptional access to talent, and you also don't have a growth that is limited by the engineering bandwidth you have for innovation work that is core to your business. And so all three are typically never true at the same time.
Mark Murphy: If you look at the top 5-10 companies in the world buying file extra size today, some don't run any third-party software and build everything themselves.
Mark Murphy: Some do run third-party software and do run on service usually on part of their businesses
Mark Murphy: But really, at the end of the day, those 510 companies are not the market for selling software or SaaS.
Mark Murphy: We see them more as a sign of things to come in terms of a broader AI adoption. So what's interesting to us is how the rest of the world starts operating AI workloads and grows into that.
Thank you for watching!
Speaker Change: Okay, understood. And then, just as a very quick follow-up, Olivia, either for Olivia or David,
Speaker Change: All three major hyperscalers did miss their Q4 revenue forecast, and they were talking about capacity constraints on the AI side. But the non-AI side, for some of them, seemed to slow, just the regular typical cloud migrations.
Speaker Change: And I'm just wondering if you felt the timing of the holidays, excuse me, had any impact on December or whether their AI capacity constraints might be flowing through to Datadog as well.
Speaker Change: Yeah, it's hard to tell exactly what's going on with the capacity constraints and things like that. You know, if I were just to compare and contrast what we do, we all grew up with the providers.
Speaker Change: Overall we're growing a bit faster than the cloud providers, including the very big bump they're getting from setting GPUs.
Speaker Change: which is not something we monetize very well on our end, in part because those GPUs are largely attached to trading workloads that we don't play a big role in, but also in part because these are new pieces of infrastructure that will have different needs as they become more broadly used by a larger number of companies.
issue back out the, as you mentioned, the
Speaker Change: GPU-related, AI-related, a part of the growth for the cloud providers. They are slowing down and we are meaningfully outgrowing them as a part of the business.
Speaker Change: And I think that if you zoom up, you know, that's sort of in line with the broader trend of, you know, we're driven by, all business is driven by digital transformation and cloud transformation, which is happening, which will keep happening. And we're outgrowing that trend now and in the long run.
Thank you very much. Really appreciate it.
Speaker Change: Thank you. Our next question comes from Sanjit Singh with Morgan Stanley. Your line is open.
Sanjit Singh: Yeah, thank you for taking the question and congrats on the record bookings quarter in Q4
Speaker Change: Olivia, I want to talk on the sales and marketing side, how you're thinking about this year in terms of...
Speaker Change: The magnitude of change versus the prior year, whether it's relating to the investments in underserved geos or the channel partners, or, you know, continuing to serve the enterprise opportunity. What do you have in store for the sales organization going into 2025?
Speaker Change: So we have quite a bit in store. There's a number of parts of the business we're being a little bit more deliberate about.
Speaker Change: pushing the product in particular in the segment where we think we're on the cusp of acceleration and critical mass and we can we can invest and and put behind that you know so there's a
Speaker Change: a few examples like you know we we mentioned for example on the some of the customer wins we discussed today we mentioned a number of wins for FlexLogs
Speaker Change: to get much better adoption in the market. We also see a very interesting and timely...
Speaker Change: competitive opening there, you know, with some of the bigger players being taken out recently. So there's efforts like that that we're pushing into. You know, another example we gave on the call or the product that's exciting to us right now is Oncall, Oncall is brand new.
Speaker Change: just entered GA but the demand is very very strong you know so we're making sure that we have the right programs from a go-to-market perspective to make sure those products can take off as they should.
Speaker Change: But, you know, if you zoom out from the, you know, specific product oriented programs or the specific, you know, partner related or segment related, because there's a number of those.
Speaker Change: What we're doing really that matters is we're growing the sales capacity. We've been growing the sales capacity last year. I would say...
Speaker Change: We probably got a bit of a slower start last year in the first half of the year at growing the sales capacity than we would have wanted. We accelerated that to about the second half of the year. We're still accelerating this sales capacity growth and we expect to see the results from that regime.
Speaker Change: When you invest, when you hire sales and marketing, you start seeing the impact in one to two years after that. When you hire engineering and you build R&D capacity, you start seeing the impact in two to three years after that. So we're pushing towards that.
Speaker Change: That makes total sense. And just as a follow-up, I actually was going to ask about logs and FlexLog. It sort of dominated a lot of your customer highlights this quarter.
In terms of like logs becoming...
Speaker Change: a sort of renewed focus you know across the sort of observability stack you obviously have some incumbents but is there anything sort of changing technologically you guys have obviously I think we architected your log platform
Speaker Change: But what seems to be driving the renewed interest in log and Cloud SAM that gets you excited about the opportunity?
Well, it's a combination of, you know, there's a, there's...
Speaker Change: Definitely new, interesting technologies and economics that relate to these technologies that resonate well with customers, so now you can keep a lot more data and keep it for a lot longer, and it's a lot more cost efficient.
Speaker Change: and so that's definitely one aspect. Second aspect is modernizing the stack with something that's really cloud-first, cloud-based, you know, which was not the case of the platforms that were mostly used before that.
Speaker Change: And then there is interesting opportunities to also unify some of the operational aspects and the security aspects. You know, so we, alongside with FlexLogs, we also see quite a bit of demand for Cloud SIEM, and we think the combination of those is very interesting.
Speaker Change: So I would say all those together would drive the renewed specific interest in that part of the business and why we're pushing this.
Thank you, I appreciate the thoughts.
Speaker Change: Thank you. Our next question comes from Raimo Lensho with Barclays. Your line is open.
Speaker Change: There's a lot of focus on the big AI guys at the moment, but that's only the starting point for the AI opportunity. Can you see what you see first?
Speaker Change: first feedback on people looking at inference workloads and Trying to have observability on them because I would assume in a long one. That's probably the bigger opportunity What do you see there and then a question and I have a follow-up for David
Thank you for watching!
Yeah, so on the inference side, the...
Speaker Change: Mostly still what customers do is they use a third-party model either through an API or through a third-party inference platform and what they're interested in is measuring whether that model is doing the right thing and that's what we serve right now with LLM observability for example that's where we see
Speaker Change: Quite a bit of adoption that does not come largely from the AI native companies
So
Speaker Change: So that's what we see today. In terms of operating the inference stack fully and how we see a relatively few customers with that yet, we think that's something that's going to come next. And by the way, we're very excited by the.
Speaker Change: The developments we see in the field, you know, so it looks like there's many, many different options that are going to be viable for running your AI inference.
there's a very healthy set of a commercial API gated
Speaker Change: services, there's models that you can install in the open source, there are models in the open source today that are reviving in a
quality with the best closed API models.
Speaker Change: So we think the ecosystem is developing into a rich, diverse ecosystem that will allow customers to have a diversity of modalities for using AI, which is exciting.
David Obstler: Okay, yes, that's really exciting. And then, David, if you think about the increased investments that we're seeing across sales and marketing and R&D, obviously, you know, we could have kind of taken kind of an accelerated approach or an approach there, like, you know, this time last year, the year before, etc. What drives your confidence or what drives the decision to kind of think this year, like, what are the signals that you're seeing out there to kind of...
Get you excited about that. Thank you
Speaker Change: It really bottoms off. We look at the geographies, in one case, where we see the white space and the evidence of success and attainment.
Speaker Change: and the accounts that, as we talked about internationally, we don't fully cover.
Speaker Change: Next, you know, as you know, we've been developing our channel and our partnerships.
We think there's a big opportunity there.
Speaker Change: So, we've been increasing our investment and see return on that, the percentage of
Speaker Change: are sales that are affected by channel partners has been increasing, so there's evidence there.
and then in terms of...
of across the different types of customers.
Speaker Change: We see very large enterprise customers that need to be treated in a certain way and have been increasing the way we go to market. Of course, we go bottoms up, but we also have an increasing effort in some key accounts. So all of those things are based on the evidence and the demand cycles we see in our results to date.
something that's in the back of the minds of
Many of the overall listeners here
Speaker Change: When we look at growing the sales capacity and the relationship between that and how we think we're going to grow the business and guidance for this year and things like that in particular.
Speaker Change: Remember that the revenue comes from usage and usage is only loosely related to in time to the bookings we get from the sales teams and so when we think about the guidance we're putting forward and
Speaker Change: What we're looking at for the year, it's all based on usage, recent usage trends that we discounted to the future. And it doesn't really incorporate a lot of the longer term gains we get from the
the scaling of the go-to-market.
Speaker Change: Just adding one more thing. I think we said that in 2023, with the risks that we saw in the market, that we did take a prudent approach.
and we slow down the growth of the go-to-market.
Speaker Change: So there is some of the catch-up of essentially these are things that we
Speaker Change: pulled back on it a little bit, took a little more conservative approach.
Speaker Change: And once we saw the evidence in some of these territories, we began to accelerate. And if you look at the sales and marketing investment in the second half of the year, you'll see that we started to be successful in increasing our quota capacity and our go-to-market investments.
Okay, perfect. Thank you.
Yeah.
Speaker Change: Thank you. Our next question comes from Cash Rangan with Goldman Sachs. Your line is open.
Cash Rangan: Hi, thank you very much. I'm wondering if I could get your assessment of
Cash Rangan: The disparity between the strong forward-looking indicators, so that's RPO, CRPO, forward-looking
The event of the business versus the the conservative guidance
Any thoughts on that?
Cash Rangan: a bit more conservative, given that your forward-looking indicators actually look a bit stronger than one would have expected. And second, maybe this is one for you, David, is there, at the margin,
Cash Rangan: Any change at all with respect to the usage upside versus the commitment that customers are making and therefore that could help understand why the guidance is what it is. Thank you so much once again.
Cash Rangan: So I think on the first question, really that's what I was just commenting on, you know, which is that the revenue report is based on usage and we only want to get the usage from customers and it's not directly linked in time to the bookings.
David Obstler, Yuka Broderick, and wohlfaheim123
There's less of a direct relationship there.
Speaker Change: Again, when we look at guidance... But Ali, I get that. I think you explained it. But at the margin, how do you convert those commitments into usage? Are there things that you're emphasizing in the organization to get better conversion in a shorter span of time? That was really the heart of the question. If I'm not clear, sorry about that.
Speaker Change: Yeah, there's a number of things we're doing for that, right? I mean, part of it is the
Speaker Change: The usual question of, you know, how much of your comp plan on the sales side should be usage versus bookings, you know, and we've definitely experimented with some different ratios there and we tried to optimize for the best outcome.
Speaker Change: But, you know, in general, again, just if I go back to the biggest question, which is what is the relationship between what we see there and the guidance? Guidance is really based on the recent trends and we extrapolate them, you know, so...
Speaker Change: with some discounts. So by definition, even though we see acceleration in some of the drivers or we ourselves invest more in some areas, it's unlikely that we... unless we see direct acceleration in the...
Speaker Change: in the recent quarter that you will see an accelerating number of the guidance there, just because of the way this is constructed. Like we're very disciplined in terms of sticking to the usage trends there.
Speaker Change: Yeah, just to add, I think, you know, we've said that in some quarters the bookings in RPO
Speaker Change: numbers might diverge from the ARR and revenue growth. I think in this query you see there's pretty good convergence, right? They all point.
Speaker Change: to the same range, et cetera. We certainly have the motion, as you mentioned, of assigning commits.
Speaker Change: and then working with clients to use those commits and then go above that. That hasn't changed. So the amount of spread between usage and commits
is similar to what it's been.
Speaker Change: is about trying to get our customers to use more of the platform. And in the metrics we show, both in terms of revenues of the different product areas and in the cross-sell metrics,
Speaker Change: that continues to be strong. I echo what Ali said was when we provide the guidance, we really haven't changed our methodology. We take what we know from those trends.
Speaker Change: and we've essentially put conservativism going forward. So I think you can't necessarily go one to one there and we've not changed our approach in doing that and providing guidance.
Speaker Change: Thank you. Our next question comes from Matt Hedberg with RBC. Your line is open.
Great. Thanks for taking my question.
Speaker Change: David, for you, it was nice to see NRR pick up a bit, and I realize that's a trailing 12 metric, and this year was met with a lot of stability here. I'm just sort of curious, you know,
Speaker Change: When you think about that, you know, going forward, what have you embedded?
Speaker Change: from a retention perspective in your 25 Outlook. And then maybe to put a finer point on the AI Native question earlier, does your guidance assume that we see a pretty stable contribution there throughout the year?
Speaker Change: Yeah, so on the first question, yes, it has been ticking up, and then what we do, essentially, there's really two inputs into revenue guidance. One is, and the largest one is, what is net retention, and the other is what contribution from new. And we essentially, as you know, and you can probably, you know, figure that out, we do take the net retention and then discount that.
Speaker Change: So that's what we look at. In terms of the AI contribution, I think we try to embed that in the level of the discount. I think we're essentially don't.
Speaker Change: assume that there's going to be some non-prorata acceleration of AI. There may be. It's a big opportunity, but we don't assume that. So we try to take the conservatism that we have in our net retention or expansion rate.
Speaker Change: and apply that across the customer base, not being smart enough to know exactly where it might be or not be.
Got it. Thanks. Congrats on the results, guys. Thanks.
Thank you for watching!
Speaker Change: Thank you. Our next question comes from Koji Ikeda with Bank of America. Your line is open.
Koji Ikeda: Hey guys, thanks so much for taking the questions. I appreciate all the disclosure on ARR coming from the three core pillars here on infrastructure monitoring, APM, and logs. And so as we move into 2025 and beyond, how do you think about the potential for infrastructure monitoring specifically, the growth there to accelerate from current levels and what would be the trigger for that?
Koji Ikeda: Good question. I think there's a, first there's a number of new use cases that are emerging that are related to infrastructure.
Speaker Change: We still have to see what the actual need is from the lab and webcasters. I'm talking in particular about...
Speaker Change: In fact, there are concerns around GPU management, GPU optimization, like there's quite a lot going on there that we can potentially do, but we, for that, we need to see broad usage of raw GPUs by a large number of customers as opposed to usage by a smaller number of AI-needed customers, which is mostly what we still see today there.
Speaker Change: There are some interesting pockets of the market that we don't get into today because...
There are still some...
Speaker Change: large IoT fleets or on-prem fleets, or things that are part of our customer setup that we were not built from day one to handle.
Speaker Change: But that are not becoming part of the issue as those customers settle in a...
Speaker Change: and they have some form of mix of what they have on the cloud and what they keep on prem and so we see some opportunity there too.
Speaker Change: We can progress on the infrastructure side. Another area is network monitoring, which we've been building up. So there's a few things there.
Speaker Change: But we definitely still see quite a bit of opportunity. The largest opportunity of course is that
Speaker Change: Look, even for infrastructure monitoring, where we're clearly the leader, we still have a relatively small part of the market that is growing in the cloud. And so a lot of our efforts have to do with making sure that, one, we land enough of the right customers. Now, again, we still have a bit left that
Speaker Change: half of the 4,500 customers today and then for those customers we get into all of their workloads, all of their environments and we keep going up.
Speaker Change: Got it. Thank you. And just a follow-up here on FX.
Speaker Change: and the impacts to revenue and guidance. And so I know the vast majority of contracts are in USD, but with 30% of revenue being international, are you considering some changes in pricing and packaging, making pricing more localized for international customers? And then also trying to understand any benefits to operating margin from FX in 2024 and how that may be accounted for in the 2025 guide. Thank you so much.
Speaker Change: Yeah, as you know, we are largely a U.S. dollar-based company, you know, our exposure is not very high.
Speaker Change: We do occasionally look at local billing. It's not something that is significant. I think that's all wrapped up into our offers to our clients.
Speaker Change: And I think, unlike other companies that have been reporting, FX is not a very major effect on our financial results.
Thank you.
Speaker Change: Thank you. Our next question comes from Eric Heath with KeyBank. Your line is open.
Eric Heath: Hey, thanks for taking the question here. Ollie, you talked about FlexLogs having a lot of success.
Speaker Change: M&A in the marketplace. Let's open up some opportunity. But just curious from displacement activity that you're seeing with some of the recent M&A takeouts on the sim and log management vendors. And
Speaker Change: Curious also what your ability is to win both the logs and security use cases, because in our feedback talking to customers and channel, it sounds like it's oftentimes one or the other, but not both. So I'm curious your ability to win both those workloads.
Thank you for watching!
Speaker Change: So, first of all, we see a lot of success with
some of the migrations in particular to Fletch Laws.
Speaker Change: The majority of those use cases are around DevOps as opposed to SIEM to start, but we do see a number of opportunities that come solely from SIEM to start with.
Speaker Change: You're right that they typically don't come together Because the two are typically purchased by different parts of the org and maybe they come they come up at different times or maybe
So what we see is that...
in the drawing number of the
Speaker Change: migration to FlexLog. We typically start with a few workloads in FlexLog in Ops and then after that we see more workloads in Ops open and some conversations on the on the team side.
Speaker Change: I would say historically the Simpsons have been harder to convert.
Speaker Change: because it is more heavily entrenched with a lot of specific queries and workflows that are built on top of legacy products.
Speaker Change: but we've developed a lot of functionality to not only come to parity with all the functionality that's being used for those.
Speaker Change: was working on the custom bid, but also to have customers directly migrate that. And that's part of the efforts that are coming to bear this year in terms of being able to actually write in the go-to market with a resource product.
Speaker Change: Awesome. And Ali, I'd love to just get some of your thoughts on agentic AI and AI generally. Just curious, when we think about agents, which parts of the core observability platform that you think are most relevant or going to be most beneficial to your business as you start to monitor those?
Speaker Change: First of all, it's a bit hard to tell because it's a very nascent field. My guess is that in a year it will probably look different from what it looks like today. Just like this year, it can look very different from what it looked like last year. What we do see, though, is that...
Speaker Change: So when we when we build so we start building our LMM opportunity product
most of the
Speaker Change: The use cases we saw there from customers were, you know, chatbot in nature or a rag in nature, you know, trying to access information and return the information. Now we see more and more customers building agents on top of that and sending us the data from their agents. So we definitely see a growing trend there of adoption. And the
LLM was a Wiki product is a good
Speaker Change: level of abstraction at least for the current iteration of these agents to look at them. So that's what we can see today.
Speaker Change: In our internal development, obviously we use our own products heavily for that, and we see a lot of different opportunities to automate work with agents on top of our platform.
Speaker Change: I will say though that we also do see new modalities, different modalities for developing those agents and the market is changing very, very quickly there.
Thanks, Holli.
Thank you.
Speaker Change: Thank you. And our final question comes from Patrick Wall-Rabins with Citizens JMP. Your line is open.
Speaker Change: Oh, great, thank you so much. So, Ollie, I think you started touching on this, but you guys help your customers to digitally transform, but when you look inside of Datadog,
Speaker Change: What are some of the processes and areas where you see the possibility to really drive some improvements?
He said Datadog? Yeah, he said Datadog.
Speaker Change: Well, everywhere, you know, what's fascinating about the current evolution of AI in particular is that it touches a lot of the different areas of the business.
Speaker Change: The first area to be transformed is really the way software is being built.
Speaker Change: you know, what engineers use, who they write software, who they debug software.
Speaker Change: They also operate their systems and part of that is outside tooling we're using for writing software. Part of that is dog fooding or new products for, you know.
Speaker Change: automated incident resolution and that sort of thing. So that's the first area. There's a number of other areas that are going to see large improvements in productivity, you know, typically everything that has to do with
Speaker Change: supporting customers, helping with onboarding, helping troubleshoot issues, all of that is in acceleration. In the end, we expect to see improvements everywhere from front office to back office.
Speaker Change: Thank you. And then the follow-up on that is, do you see your, your,
Speaker Change: Your efficiency as an organization overall, you know, increasing where you can just grow with sort of the same number of people. If you feel like in the future you're going to need to add the same amount of headcount to drive growth as you do today.
Well, I mean, in general, just to...
Speaker Change: to the level that we're very efficient as an organization already. We have really new sales efficiency metrics, we have...
Speaker Change: We've been a highly innovative growing class and at the same time we've shown that we could we could give a very good margin for all the way to the bottom line. So I consider ourselves to be a very efficient organization.
Right now, any productivity we gain on the...
R&D side.
Speaker Change: is reinvested in building more and developing more functionality and generating more growth. I would say in the short to mid-term we should expect also that any productivity we gain on the other side of the business is also going to be reinvested in R&D and building more and getting more differentiation or in getting more scale faster on the GTM side.
Speaker Change: So for the short to mid-term, that should be the expectation. Long-term, I was always expecting us to be a very efficient company and a highly profitable company, and I think all of those advantages are only going to emphasize that.
Great. Thanks, Holly.
Speaker Change: Thank you. This concludes the question and answer session. I would now like to turn it back to CEO Olivier Pomel for closing remarks.
Speaker Change: Alright, thank you. And again, I want to thank the team for a super, super productive year. We have a lot planned, whether that's on the go-to-market side, scaling the company, or on the product development side for 2025.
Speaker Change: So I'm really impatient to see how this unfolds and to share with everyone and our customers in particular, everything we've been working on. So thank you all.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.